Tuesday Tips is a series of articles from local experts to help you save money, make better decisions and plan for a better future.
So the kids just got into college, eh? Well, don’t party too hard – that tuition bill is coming your way. Luckily, it’s still tax planning season and you have until December 31 to start finding money in the tax system to help put your kid through school.
So we asked our resident tax expert, Joseph Reisman, to put together a list of three opportunities – two tax credits and a savings plan – that will ease the burden of paying for your child’s education. Unfortunately, there’s not much we can do to soften the blow when your son says he’s majoring in Philosophy of Latin Women’s Studies… (Ed. — Actually, that sounds kind of hot.)
Facts about the American Opportunity Tax Credit
Have a kid in college? Need a few more dollars? The American Opportunity Tax Credit could be for you.
- The tax credit is for tuition and related expenses like fees, books, and other required course materials. So, save those receipts.
- If you paid $4,000 or more in college fees, your credit will be $2,500 computed as: (1) $2,000 on the first $2,000 spent on each student, plus (2) 25 percent of the next $2,000.
- Of course, if you are rich, your benefit decreases. What is rich? Rich is defined as income of $80,000 for individual taxpayers and $160,000 for couples.
- The tax credit carries a 40 percent rebate, which means that even if you don’t pay taxes, you will receive up to $1,000 for each student as a cash back payment.
- The American Opportunity Tax Credit is available for any of the first four years of college education.
- But, you cannot claim the tuition and fees tax deduction in the same year that you claim the American Opportunity Tax Credit or the Lifetime Learning Credit. You must choose to either take the credit or the deduction and should consider which is more beneficial for you.
Don’t Qualify For the American Opportunity Tax Credit?
The alternative is the Lifetime Learning Credit.
- The credit is for tuition only; not for student activity fees, general athletics, room and board, insurance, transportation, living expenses, or book and equipment.
- The credit is 20 percent of the first $10,000 in expenses. This maximum of $2,000 is applied on a per family, rather than a per student, basis.
- Of course, if you are rich, your benefit decreases. What is rich? Rich is defined as income of $60,000 for individual taxpayers, and $120,000 for couples
- This credit is against tax only. If your credit exceeds your tax, you do not get a rebate for the remainder.
- You do not have to be enrolled at least half time to receive this credit. And it covers any post-secondary education, not just the first four years of college education.
Don’t Forget the 529 Savings Plans
The 529 is a tax-free educational savings plan sponsored by the State for any post-secondary education.
This money can be used for just about any expenses like tuition, fees, books, computers and other technology, internet access, room and board, and more.
Some States, like New Jersey, do not allow you a tax deduction for contributing to a 529 plan, but others do. New York, for example, allows you a maximum deduction for the amount you contribute – $5,000 for an individual, $10,000 for married filing jointly.
For you New Yorkers, here’s the fact that you probably do not know.If your child is in college, you can contribute to the plan today, and withdraw the money next month, and get a New York State tax deduction.
Read that last sentence again. It is true. So if you have a college student in your family, you can take advantage of this great loophole before the end of this year. And what is your savings? For a joint return, $800, $900, $1,000; depends upon your effective tax rate. FOUND MONEY.
Take advantage of all these credits and deductions before they expire. One more thing. The above is not a full detail of the law. There is a maze to drive through of dos, don’ts and maybes, so review carefully with your tax preparer before taking these credits. Or call me with your questions.
Please remember, we are still in the ‘tax planning season.’ You have until December 31 to plan for all of these benefits.
Joseph Reisman, of Joseph S. Reisman & Associates, has been serving tax prep and business accounting expertise from his Coney Island Avenue office for more than 25 years. Check out the firm’s website.